Resource nationalism - Issues affecting companies operating abroad

Materials World magazine
,
1 Dec 2008

Michael Forrest talks to Robert Amsterdam, Principal Lawyer at Amsterdam & Peroff, London, UK, about the dangers facing overseas mining investments.

Over the past few years the rise in commodity prices has encouraged producing countries to take an interest in the fiscal and legal polices that regulate oil and mineral extraction. Unsurprisingly, nations with good mineral endowment wish to maximise their income revenue, while producing companies wish to maximise returns for shareholders. When commodity prices are low, the threat of raising royalties and taxation can be offset by an equal threat from the mining companies to take their business elsewhere, and can act as a disincentive to future exploration and investment.

The Milton Freidman model for economic development is preferred – keeping government intervention to a minimum and leaving politics at the door. This model has facilitated the expansion and geographic reach of multinational mining companies, and ensured the provision of commodities at reasonable prices. It has also helped revitalise mining economies, such as Zambia’s, following unsuccessful state monopolies.

However, according to Robert Amsterdam, Principal Lawyer at Amsterdam & Peroff, London, UK, the past increase in commodity prices has encouraged producing countries to review the economic returns they get from minerals, including oil. He says, ‘These reviews have, in some cases, resulted in the expropriation of mineral resources, the most well known case being that of oil concessions in Venezuela by the Hugo Chavez government. Examples of similar recovery of oil licences by state governments is well reported in Russia’.

Think local

All mining or exploration projects are subject to the regulations and codes of the host country. These are often negotiated when the Government sees advantages for economic development. In the majority of cases the mining or oil company represents investors from wealthier nations, with little involvement or financial input from local investors, apart from in some cases statutory government shareholdings.

Most mining companies are not, as a matter of course, politically savvy. They rely on international/ multinational law companies to guide them through deals with the licensing authorities. Amsterdam says these ‘white shoe’ legal firms are fully competent at the large corporation/government level and often have an office in the capital of the host country. If, however, the government decides to revoke licences, as happened recently when 1,664 mining concessions were returned to state control in Ecuador, the law firms may not be able to help as they are part of the same infrastructure, owing their licence to practise in that country to the same expropriating government.

Amsterdam has practical experience of challenging governments in the extractive sector. His advice is to think local and retain the services of a good criminal law firm. In many countries these lawyers do not speak English (with China being an exception) but they do have connections, and their local knowledge will pay dividends.

It is not only national governments that can act. Local authorities can also have powers and often wield them with vigour. This can result in denying local licences for failure to conform to the business desires of those officials. Again, Amsterdam notes the lawyer with local knowledge can be invaluable. Often these points are missed in the honeymoon period at project signing where the host government is surrounded by mining company senior management, its offshore accountants and lawyers, all representing foreign investors who have no interest in the host country other than the investment opportunity.

Without borders

The rise of resource nationalism is not confined within borders. There is a new climate of securing mineral resources for economic development. This nationalism has been displayed by China and to a lesser extent Russia and India, and can be seen as an adjunct to foreign policy. China, in particular, has aggressively moved into developing countries to secure resources. Its companies, often parastatal, have the backing of the government whose foreign policy and mercantile objectives are entwined.

In metals, for example, China is looking at Africa, particularly countries such as the Congo, to secure supply for the future. Their objectives are not purely trade- and investment-based, but have a political overtone, with sponsored companies and shareholders often linked to those in power. It is not only metals that China wishes to secure. The largest exporter of oil to China is no longer Saudi Arabia but Angola.

The perception of risk by Chinese-, Russian- and Indian-sponsored companies is different from the typical Western company and its shareholder investors. Their policies are long-term and different from the West, where capitalism and market forces have divorced companies from their governments. This has greatly weakened the ability of businesses to compete in this new environment.

Examples of this competition include the investment by Russian company Rosneft in the Orinoco Basin (between Colombia and Venezuela from the Andes to the Atlantic), the area previously explored by American oil companies before their assets were expropriated. As an indication of the scale of interest, China has provided a US$12bln loan facility to the Venezuelan government. In more extreme cases this policy has been applied to individuals whose companies have not conformed to the law or the policies of the government.

The checklist

Amsterdam has produced a checklist for those investing in resources in challenging countries. The list illustrates the policies used by governments to enhance resource nationalism. They include innovative tactics in administrative law to apply pressure on targeted assets, such as visas and operating licences. Other ‘policies’, such as making taxation compliance difficult through red tape, are preferred instruments to influence foreign investors in some countries.

If the host nation has signed a bilateral investment treaty with the investor country, that offers some protection. They refer to agreements between governments to ensure fair and equitable treatment and are especially valid if they contain clauses to include international arbitration. Political risk insurance may be an appropriate response to investing in some countries and, if this is not available, there is the Overseas Private Investment Corporation, an agency of the US Government, or the Multinational Investment Guarantee Agency, which is a member of the World Bank Group.

Companies can, and should, according to Amsterdam, fight attempts by governments to expropriate natural resources which they have developed. Reverting to international arbitration may be the answer if the participating companies can afford to wait the 10 years that such a case might take. Even so, being the first test case might not be a good idea. One strategy that has proven effective in a number of cases is referring to Article 1 of the declaration of human rights by the United Nations, which protects private assets.

‘The whole world has changed and most investors have done nothing to protect their interests,’ notes Amsterdam. ‘They need to think strategically, engage a different checklist and think local. As commodity prices decline, governments that are anxious to maximise income will be looking at your projects.’

The checklist can be found at: www.robertamsterdam.com/2008/06/the_resource_nationalism_check.htm.